Tesla and Bitcoin Through a Business Acumen Lens
You may have heard about Tesla’s $1.5 BILLION investment in Bitcoin, and as I have been, you’ve probably stayed awake at night trying to figure out how they account for it. Is digital currency a cash equivalent —especially with its current volatility?
Summary:
Bitcoin and other crypto (digital assets) are being held, in most cases, as intangible assets with an indefinite life.
Digital Assets (DAs) are carried at historical purchase cost.
DAs are subject to impairment and are tested at least annually but also if there is a triggering event.
If carrying value of DA is greater than fair market value (FMV), an impairment must be recorded (value decreased on balance sheet, corresponding cost recorded on P&L.)
Once impaired, always impaired. You cannot write the value back up if FMV is greater than the caring value.
If you sell the DA when FMV is greater than carrying value, you record a gain on the sale of an asset.
International Financial Reporting Standards for intangible assets differ slightly. They allow you to write the value back up if FMV is greater than the carrying value, but only up to the original purchase value. The write up would be reflected on the P&L.
These standards may differ if you are a custodian of DAs or if the DA has a claim to cash.
How Tesla Accounts for Digital Currency
It seems pretty conservative.
Tesla accounts for its Bitcoin as a Digital Asset which they are treating like intangible assets. That means it’s recorded on their balance sheet at their cost at the time they purchased it (the fair market value at the time they purchased it = the historic purchase value concept found on the balance sheet).
“But, Ryan, it’s been more volatile than a teenager’s love life. Wouldn’t that Asset then jump around the market like a Cypress Hill concert?”
That is a great question. Thank you for asking. That’s where conservatism comes in. Like any other intangible asset, Tesla has to test for impairment by asking, “is this Bitcoin still worth what we bought it for?” If the current fair market value of Bitcoin is less than the book or carrying value (historic purchase value) then they have to impair it, meaning they have to write down the value of the Bitcoin on their balance sheet, and take the impairment as an expense on the P&L as well.
“What if the price keeps going up like Elon’s Roadster?”
Well... just about nothing. On US GAAP balance sheets, the value of intangible assets are not “written-up” to the current fair market value. It will never go higher than the original recorded purchase price, and once impaired always impaired on the balance sheet. If/when they sell the Bitcoin, they may record a gain on the sale of an asset if the price of Bitcoin at the time of sale is higher than the carrying value (cost minus the impairment).
“What if US GAAP isn’t the right way to handle the increased value of an intangible asset?”
You must be studying accounting. US GAAP is not the only way to handle intangible asset accounting. In fact, IFRS (International Financial Reporting Standards) allows you to write the value of an intangible asset back up with the fair market value. That means, if you bought Bitcoin at its high of $62,000 and then someone sneezes and it drops back down to $46,000, you would have to impair the Bitcoin on your balance sheet (from $62k down to $46k, by recording an impairment expense of $16k). In US GAAP, that’s your new basis, it can only go down from there. However, IFRS allows you to write the value back up as the market explodes back to $53,000 because someone finally got his meatloaf. The write up is also reflected on the P&L.
“But what if the price goes up to $100k like they’re saying? ”
There is a limit, and although IFRS balance sheets may be closer to being valued at FMV, you would only be able to write the value up to the original cost. That said, many companies using IFRS choose to adopt the “lower of cost or market” philosophy found in US GAAP.
“Oh, so it’s kind of complicated?”
Yes. The accounting treatment is evolving, but the industry tends to be conservative and move slowly. Things that may complicate the issue include whether the company is a custodian of DAs or holds them for future economic use like Tesla. Also, the type of DA — whether there is an active market, the reliability of the data in the market, when there is more than one active market, and whether the DA has a claim to cash or not. There is just a ton of stuff that still has to be worked out. That’s why auditors are being more conservative. We don’t need another Enron.
Ryan Hunt, Senior Consultant at Acumen Learning
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